Wednesday, January 19

In conversation with Lesetja Kganyago

the Reserve Bank of South Africa it is essential to formulate and implement monetary policy and guarantee the financial stability of the country. In this Wits Business School leadership dialogue, Professor Mills Soko Talk to Reserve Bank Governor Lesetja Kganyago on the central bank and the problems it faces on a day-to-day basis.

Mills Soko: When you were made governor, one of the first things you did was go to your village and go shopping. What was the meaning of this gesture?


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Lesetja Kganyago: I felt it was an opportunity to teach people about the value of money. And I went back to the same store, where every morning I went to buy bread before going to school. There was an important inflation lesson because at that time, 1972, a loaf of bread cost 10 cents. And I was telling the villagers, you can’t get a loaf of bread for 10 cents today. You can’t even get it for R10, but the bread size remains the same. I told you, therein lies the lesson of inflation, and that is why we have to keep inflation under control. I think the message got through to them.

Mills Soko: Are there differences between the mandate of the Reserve Bank of South Africa and other central banks around the world?

Lesetja Kganyago: Central banks are creatures of their society. Society creates institutions and gives them a particular responsibility. The only thing central banks have in common is that they have a responsibility for price stability.

The authors of our constitution believed that price stability is not an end in itself. It is a prerequisite for balanced and sustainable growth. South Africa’s constitution goes even further. It says that the central bank can also do other things, usually done by other central banks, as long as they are detailed in national legislation.

The bank is also responsible for financial stability, described in the Financial Sector Regulation Law, and the country payment system, enabled by the Law of National Payment Systems.

Mills Soko: Why is the focus limited to price stability? Why not focus on unemployment?

Lesetja Kganyago: We need balanced and sustainable growth. Price stability is a necessary condition for that growth. But it is by no means a sufficient condition.

It is important to distinguish between two important aspects. Monetary policy can only affect what is called cyclical growth. It will not affect structural growth. The monetary policy horizon is 12 to 18 months. So monetary policy can only affect growth in the short term.

Job creation is the result of sustained economic growth. For that to happen, all actors in the economy must work together to achieve it.

I have a friend who explains this using the metaphor of the speed limit on the highway. If you drive faster than the speed limit, you may even lose your life or very soon have a court date because you have exceeded the speed limit. If you drive below the speed limit, you will likely arrive at your destination later than you would otherwise.

Central banks can better influence short-term or cyclical growth.

The central bank is not going to create that higher growth rate that we require on its own. There is nothing that monetary policy can do to produce the engineers that the country needs to grow its economy. This is just one example.

Mills Soko: How does the Bank’s Monetary Policy Committee work?

Lesetja Kganyago: It is made up of the governor and the three lieutenant governors. Then they add one or two staff members. We currently have the chief economist, and they are part of the Monetary policy committee.

The model we use to forecast, like all economic models, has assumptions. Then, the process begins with the meeting of the members of the Monetary Policy Committee with the Department of Economic Research to agree on what the assumptions for the forecast will be. The two most important assumptions have to do with the price of oil and the exchange rate. They are important because they influence what will happen to inflation and economic growth.

After we approve the assumptions, the Bank’s modeling team produces a forecast of what they think will be economic growth and inflation.

Then the Monetary Policy Committee will meet with various officials for three days. On the first day we assess the state of the economy, starting with the global economic outlook, moving on to the national economy, and then we analyze the national and global financial markets, respectively. On the second day, a smaller group debates the forecast.

On the third day, the chief economist will outline the options and give the reasons why we should keep interest rates the same, why we should raise or cut them.

Then each member of the committee will say what their preference is.

If there is disagreement, we will debate and debate and debate some more. If we can’t convince each other, we follow the preferences of the majority of the committee. Once this is done, the chief economist writes the statement, which is sent to all members. The committee then discusses each word and where each comma should be. And in that moment you realize that your English is more important than your finances.

Mills Soko: What do you think of a cryptocurrency?

Lesetja Kganyago: It is a crypto asset. A coin must meet the following three criteria. First, it must be a generally acceptable medium of exchange. Second, it must be accepted as a store of value. And third, it must be a unit of account. A cryptocurrency is a store of value. It is a medium of exchange, but it is not generally accepted. It is only accepted by those who participate in it.

Our focus is that we are going to have to regulate this because people are going to invest in cryptocurrencies and when they lose money, they ask what the government has done about it.

Many of these crypto assets have a technology called blockchain that underlies them. It can be useful in many other ways. And so, like many other central banks, we are experimenting with blockchain technology.

Mills Soko: Are there plans to regulate fintech companies in the same way that banks are regulated?

Lesetja Kganyago: We do not pretend to regulate fintech firms like banks. But if it walks and squawks like a duck, then it is a duck. So if you are a fintech company and accept deposits, we will regulate you as a deposit taker. If you are a fintech, and you transmit money, we will regulate you as a payment provider. If you are a fintech, and you sell insurance policies, we will regulate you as an insurer.

Our regulatory mandate is to regulate the activity.

It is important that we understand the value that fintech companies bring to the financial sector. We have created an innovation center at the Reserve Bank in response to growth in this area.

Mills Soko: Central bank governors have been criticized for being a group of unelected bureaucrats who make decisions without accountability. What is your answer?

Lesetja Kganyago: Central bankers are not elected. Yes, we are technocrats. Yes, we have a lot of power. One Author call it unelected power.

I don’t think we should have chosen central bankers. I think it will defeat the purpose because instead of focusing on the task at hand, they will focus on the next election.

Central banking was given to technocrats whose job it is to make the tough decisions. But around the world, the power of technocrats is limited. There are parameters. And within these, central bankers must act independently, without fear or favor. In our case, this is prescribed in the South African constitution.

The flip side of preserving independence is accountability. We have to be responsible for the decisions we make and the way we make them.

U.S bill to parliament. We are also accountable to the public through our own public forums. The decisions we make are transparent and in the public domain, so they are open to public scrutiny.

This is an excerpt from the Wits Business School Leadership Dialogue. The full interview is available here.The conversation

Soko Mills, Professor: Strategy and International Business, Wits Business School, University of the Witwatersrand

This article is republished from The conversation under a Creative Commons license. Read the Original article.

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